Swift blockchain interoperability experimentation

Early June SWIFT, the largest interbank messaging system in the world,  announced it would conduct experiments in collaboration with a number of financial institutions to test for blockchain interoperability.

Blockchain interoperability has emerged as a hot topic within the crypto space. Institutional investors are increasingly considering investments in tokenised assets. They however are confronted with various challenges since these assets are on different blockchains that are not interoperable.

But first, what is blockchain interoperability?

Blockchain interoperability is the idea of enabling distinct blockchain networks to interact and integrate. It would allow different blockchain protocols to actively and seamlessly communicate with each other, thereby allowing for the sharing of data between different blockchains.

Blockchain interoperability would mean that any blockchain layer could transact or send messages to an outside chain, which may result in making it easier to use different blockchain networks.

Notwithstanding there are many projects showing great improvements in finding a solution to interoperability, in its current state, there are no layer-1 blockchain protocols that are able to do this.

Why the SWIFT interoperability project?

Institutional investors are increasingly considering investments in tokenized assets as they seek new and alternative investments. These tokenized investments however are tracked on different blockchain networks.

The institutions thereby face the problem of blockchains not being interoperable, with each having its own functionality or liquidity, which creates significant overhead and friction in managing and trading the assets.

SWIFT wants to overcome these interoperability challenges among blockchains, which is key to the long-term scalability of the market and is aligned with the company’s focus on removing friction in international transactions.

SWIFT is thereby looking to help these firms leverage their existing infrastructure by developing an interoperability model that would enable access to different blockchain platforms globally, where tokens are recorded in a way that is both compliant and secure. Not only would this help firms simplify their architecture and operations, but it also minimizes investment costs and reduces risk of technology obsolescence.

SWIFT Blockchain interoperability experiment 2023

Early June SWIFT has announced it would start a blockchain interoperability settlement experiment. They are thereby teaming up with Chainlink, the world’s largest Web3 services platform and several financial institutions and market infrastructures to explore blockchain interoperability for seamless tokenized asset settlements.

In addition to enabling financial institutions to interact with multiple blockchain networks, SWIFT will also explore a set of non-technological considerations that are necessary for regulated institutions to interact with public blockchain networks and engage in cross-network transactions.

This encompasses a range of operational, compliance, and regulatory challenges, including key focus areas like confidentiality and privacy of data, or liability and recourse when transacting with public blockchain environments.

Their findings will be published later this year.

SWIFT and former blockchain tests

This new round of experimentation follows a series of largely successful trials in 2022 that explored how SWIFT could integrate digital currencies and tokenized assets with the world’s existing financial ecosystem.

These projects were aimed to connect SWIFT’s network to nearly every blockchain to allow traditional finance players access to digital and traditional assets on one network. Thereby a proof-of-concept was conducted with price oracle provider Chainlink which would allow traditional finance firms the ability to transact across blockchain networks.

The PoC thereby utilized Chainlink’s cross-chain interoperability protocol (CCIP), allowing SWIFT messages to instruct token transfers across nearly every blockchain network, which, if successful, would accelerate the adoption of distributed ledger technology (DLT) across capital markets and traditional finance.

This collaboration with SWIFT would allow financial institutions to gain blockchain capability without replacing, developing and integrating new connectivity into legacy systems, something it said would require substantial modifications with an “exceptionally high” cost.

The Experimentation: collaboration

In a number of experiments, SWIFT will collaborate with more than a dozen major financial institutions and financial market infrastructures. These include Australia and New Zealand Banking Group Limited (ANZ), BNP Paribas, BNY Mellon, Citi, Clearstream, Euroclear, Lloyds Banking Group, SIX Digital Exchange (SDX) and The Depository Trust & Clearing Corporation (DTCC)  

One of the main goals for SWIFT is to connect siloed blockchain networks into an interoperable system that allows financial institutions to easily interact with multiple blockchain-based networks

They thereby want to explore how institutions can use their SWIFT connection and Chainlink’s Cross-Chain Interoperability Protocol (CCIP), and leverage their existing messaging network as a means to seamlessly interoperate with the multitude of blockchain networks emerging around the world, thereby efficiently instructing the transfer of tokenised value.  

By doing this these interactions should be made in a secured and trusted way, just like as the current means of trading traditional assets while using blockchain technology to improve efficiencies, costs and opportunities.

Role of Chainlink

Chainlink, a leading Web3 services platform, is a decentralized oracle network that provides secure and reliable data feeds to smart contracts on the Ethereum blockchain. Chainlink is thereby offering oracle services that can power smart contracts on any blockchain.

Web3 is the evolution of the internet to incorporate so-called state-of-the-art technology, among others blockchain networks. The major part of this evolution is decentralized access to financial systems.

The use of cryptocurrencies and tokens on blockchain platforms would also allow the creation of new use cases and opportunities. Up till recently these two couldn’t be accessed with ease and simultaneously. With the advent of interoperability in Web3 this and much more will be possible.

Blockchain oracles are important for real-world blockchain use. Oracles provide connectivity between on-chain systems such as decentralised applications (DApps) and smart contracts and off-chain systems, allowing data pull/push between both parties. This offers enterprises across major industries a universal gateway to any blockchain. Without oracles, these on-chain systems can only interact on the blockchain they are built for, severally limiting their application.

It’s clear that as banks try to access multiple blockchains, a common connectivity layer across the various chains will be a critical building block for their adoption of on-chain finance.

Chainlink will facilitate this process by providing connectivity across public and private blockchains for these experiments. Chainlink will thereby be used as an enterprise abstraction layer to securely connect the SWIFT network to the Ethereum Sepolia network, while Chainlink’s Cross-Chain Interoperability Protocol will enable complete interoperability between the source and destination blockchains.

Potential implementations

The tests aim to solve the challenges presented by the multitude of networks that are not interoperable and therefore create friction in the handling of assets

The main focus of the upcoming experiments will be to show how SWIFT’s infrastructure can be leveraged to facilitate interoperability, enabling tokenized value to be transferred between existing systems and both public and private DLT platforms with existing connectivity, standards, and messaging.

The SWIFT Blockchain interoperability experiment will include a number of use cases. The first use case will involve the transfer of tokenised assets between two wallets on the same public blockchain network (Ethereum Sepolia testnet). The second involves the transfer of tokenised assets from a public blockchain (Ethereum) to a permissioned blockchain. And a third use case will test the transfer of tokenised assets from Ethereum to another public blockchain.

What may it bring?

The experiments will help advance the industry’s understanding about the technical and business requirements involved when interacting with and between multiple blockchain networks.

They will thereby highlight the potential value of using a blockchain interoperability protocol to securely transfer data and value between legacy systems and a potentially unlimited number of blockchains.

If these experiments prove to be successful, removing these frictions would aid in the institutional adoption of tokenized assets and long-term market adoption. Not only would this grow the blockchain industry in an accelerated way from where it is today, but it would clearly show capital markets the many benefits of adopting on-chain finance.

This collaboration between SWIFT and Chainlink could pave the way for leading institutions like DTCC, Euroclear, BNP Paribas, BNY Mellon, Citi, and many others to issue and transact trillions of euros/dollars using smart contracts. It may help accelerate the speed at which banks can utilize blockchains.

But there are other blockchain interoperability solutions

Oracles are not the only solution for blockchain interoperability. There are a multitude of other protocols that have already taken steps towards interoperability. But up till now most efforts have been channelled towards providing applications with the ability to interoperate with each other within the same protocol.

The progress in development interoperability solutions however varies. Some have shown more progress than other but was is certain is that developments are moving forward.

Next to that protocols approach interoperability from different perspectives. Next to oracles, these include parachains, inter-blockchain communication protocols, sidechains, decentralised direct bridges and others.

Parallel Parachains

Interoperable parallel parachains can be thought of as individual Layer-1 blockchains that have the ability to function in parallel within the ecosystem enabling the exchange of data. These parallel parachains are custom blockchains built to host different projects and DApps. With each parachain sharing the same architecture, cross-chain interoperability is guaranteed.

Each parachain relies on a central shard within the ecosystem for cross-chain communication and security to send information from one application to another.

This method is referred to as ‘pooled security’ that  allows validators from this central shard to confirm that the information being relayed is correct against the current state of the application. If all information being exchanged can be confirmed, it is passed through to the corresponding parachain.

Inter-blockchain communication (IBC)

Blockchain interoperability could also be delivered using inter-blockchain communication (IBC). The IBC protocol supports a suite of cross-chain applications.

By using the inter-blockchain communication protocol, chains can communicate with the creation of certificates to correspond and transact between chains. This enables users to freely exchange data and assets over blockchains.

Cross-chain certificates are a scalable and efficient way of interoperability, but come with their own sets of requirements and limitations. The major limitation of this is that if a chain cannot produce certificates, direct communication is not possible so interoperability cannot be achieved. 

Decentralised direct bridges

Another blockchain interoperability solution driving cross-chain activities is through decentralized direct bridges. Bridges employ so-called child chains to communicate transactions between different Layer-1’s. The bridge allows thereby seamless transferring tokens and digital assets between different blockchains through shared child chains.

There are various types of bridges including direct bridges that enable quick and secure transfer of digital assets including tokens from the source chain to the destination chain without the need for intermediaries or a relay network, and Layer-2 bridges that are used for bridging assets between layer-2 networks.

Sidechains

And there is the interoperability solution that uses sidechain technology to allow for communication between chains. Sidechains are separate, independent blockchains linked to the main blockchain (mainchain) using a two-way bridge. A sidechain enables tokens or digital assets to be transferred between the mainchain and the sidechain.

Sidechains require applications outside of the mainnet to communicate information from one chain to another. With sidechains, all blockchain applications work independently of one another. Sidechains can relay information across the network via the mainnet.

This interoperability solution relies on cross-chain messaging to interoperate. They are thereby using a system of certificates to communicate transactions and timestamps to confirm data. This process allows for accurate validation of data sent. After these messages reach the receiving platform, they can be verified and added to the block.

This interoperability solution however has its limits and depends on a lot of factors. It is limited to Proof of Stake (PoS) chains with very specific necessities, that are capable of accepting these kinds of communication. They add complexity to the blockchain design and require a lot of effort and investment for the initial setup.

Final remarks

Blockchain interoperability should be seen as the next step in the evolution of blockchain technology. It is clear that as banks endeavour to access multiple blockchains, a common connectivity layer across the various chains will be a critical building block for their adoption of on-chain finance.

Interoperability will significantly aid real-world blockchain utility, as crypto adoption increases across the globe. The ability for linkages between on-chain and off-chain systems thereby provides incredible opportunities.

Developing interoperable blockchain solutions has already taken years of development and intensive labour. Though there have already been early successes in blockchain interoperability and we are seeing a drive towards simpler and more efficient interoperable solutions, this is just the beginning. If the Swift experiment project succeeds that would be a great breakthrough.